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If you use the IRS tax withholding calculator, you might want to run your results by your accountant before you adjust the amount of income taxes that are pulled from your paycheck.
That’s because user error and failure to consider your state and local tax loads could lead to you making incorrect adjustments to your withholding.
The IRS, which has just released its new income tax form, also has new tax withholding tables, reflecting changes stemming from the Tax Cuts and Jobs Act.
The new legislation roughly doubled the standard deduction, did away with personal exemptions and trimmed individual income tax rates.
Filers are supposed to use the new withholding calculator to determine what, if any, changes they should make at work to ensure that they’re paying just the right amount of tax at every pay period.
Just make sure you recheck your data with your accountant before you make any changes, tax experts say.
“A lot of people don’t understand the line items and you have to make sure you’re accounting for that accurately,” said certified financial planner Debbie J. Freeman, a CPA and director of financial planning at Peak Financial Advisors in Denver.
“Unless you understand taxes, it’s not something you should fully rely on,” she said.
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How much income tax your payroll company pulls from your paycheck depends on the number of allowances you claim on Form W-4.
The more allowances you take — you can claim them if you have dependents, if you itemize deductions, if you’re a breadwinner and your spouse is unemployed — then the less tax you will have withheld from your pay.
If you withhold too much tax, you’ll get a large refund from Uncle Sam next spring, but you’ve basically given the government an interest-free loan.
Meanwhile, if you withhold too little, and you’ll end up on the hook for taxes owed.
“If you can take a stab at it, it’s worthwhile to use the calculator, but I worry that people will fill it out wrong, fail to withhold enough and have a surprise next year,” said Chris Benson, a CPA and principal at L.K. Benson & Co. in Towson, Md.
State and local taxThe biggest catch with the withholding calculator is that it doesn’t have an input for state and local taxes.
After crunching the numbers for a New Jersey-based married couple that files jointly and with one dependent, the IRS calculator suggested that the higher-earning spouse claim zero allowances and the lower-earning spouse claim six.
> But that result doesn’t consider the Garden State’s levy on incomes, which comes in at a top rate of 8.97 percent.
“The W-4 is supposed to change your federal withholding, but often employers give you the same allowances on the federal and state side,” said Freeman. Taking six allowances for federal and state would have likely resulted in the couple owing New Jersey next April, she said.
Instead, the lower-earning spouse could take three allowances on the federal return and three on the state, Freeman said.
It’s best to contact your employer’s payroll department to give them the heads up on how you would like to deduct state taxes.
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User error and unfamiliarity with the appropriate deductions and credits may also result in questionable calculator results.
Though you can plug in your data for the child and dependent care credit, the child tax credit and more, you have to be aware as to whether you qualify for those tax breaks.
And people who itemize their deductions may take more allowances, thus reducing the amount of taxes pulled from their paychecks.
Given that the new tax law has increased the standard deduction and fewer people will itemize in the 2018 tax year, you’ll want to make sure that you aren’t withholding too little.
It’s another reason why you should run your calculator results by your tax preparer to fine-tune your withholding and make sure you’re on track to either break even or receive a small refund.
“I would say this is a pretty complicated form to fill out for someone who knows nothing about taxes, even if it’s just a married couple with W-2s,” said Benson.
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